Fitch affirms Estonia's A+ credit rating

Fitch Ratings, which assigns long-term credit ratings (Issuer Default Ratings - IDRs) to countries on alphabetic scale from 'AAA' to 'D', has affirmed Estonia's rating at 'A+' and said that the country's credit outlook is stable.

According to the report, Estonia's ratings are underpinned by a strong sovereign balance sheet with very low debt, high governance indicators compared with rating peers, and a sound economic policy framework.

Estonia's government debt to GDP ratio stood at 10.5 percent of GDP in 2014 - the lowest in the European Union. Around a quarter of the overall debt stock is accounted for by European Financial Stability Facility (EFSF) guarantees. Estonia is one of only six OECD countries with a public sector net asset position.

The national government deficit was 0.3 percent of GDP in 2014. Fitch expects the deficit for 2014 as a whole to be 0.5 percent of GDP, and to remain broadly stable over the forecast horizon. The debt to GDP ratio is forecast to edge back to 10.3 percent by 2016.

The GDP growth for 2014 is expected to be around 2 percent, before picking up to 2.4 percent in the following year and 2.8 percent in 2016. Domestic demand will be the main driver of growth over the coming years.

Fitch also predicts that the process of convergence of Estonian incomes with the Eurozone average will continue.

However, as a small, open economy, Estonia is vulnerable to adverse shocks affecting its main trading partners, and Estonia's GDP and inflation are much more volatile compared with rating peers. Russia is currently Estonia's third-largest trading partner. Consequently, a key risk to economic prospects is a further disruption in trade and investment flows between Russia and Western countries, the report said.

Current demographic trends are also a weakness. Both the total and the working-age population are shrinking. This creates pressures on wages in the short term. In the longer term, relatively larger decreases in the working-age population would raise the dependency ratio and exert downward pressure on potential growth, unless productivity improves, reported Fitch.